Fundsmith Equity has lost its leading place in FE Trustnet’s research into the funds that have consistently topped the IA Global sector on a wide range of performance and risk metrics.
Global equities are an area where active managers tend to struggle. FE Analytics shows that the average fund in the IA Global sector made a 45.91 per cent total return over the five years to the end of 2018, compared with a gain of 62.51 per cent from the MSCI World index.
As part of our annual series, we compared IA Global funds across 10 metrics: cumulative five-year returns up to the end of 2018 as well as the individual returns of 2018, 2017 and 2016, annualised volatility, alpha generation, Sharpe ratio, maximum drawdown, and upside and downside capture relative to the sector average. Each fund was then scored on the average decile ranking for these 10 metrics.
Fundsmith Equity is one member of the sector that has proven immensely popular with investors on the back of a strong track record of outperformance. Indeed, it has held first place in this research series for the past two years but it was beaten by the slightest of margins this time around.
Performance of fund vs sector and index over 5yrs to end of 2018
Source: FE Analytics
Lindsell Train Global Equity now tops the table in this research with an average decile ranking of 2. This is the same as Fundsmith Equity’s score, but the Lindsell Train offering posted total return of 128.88 per cent over the five years in question – which is only just ahead of the 127.95 per cent made by Terry Smith’s fund.
Run by FE Alpha Manager duo of Michael Lindsell and Nick Train, the £5.7bn fund is based around the belief that high-quality, cash-generative and easily understood business franchises are undervalued by the market and will outperform over the long run.
The process results in a concentrated portfolio of stocks that rarely changes; top holdings include Unilever, Diageo, Heineken Holdings, PayPal and World Wrestling Entertainment.
In a recent note, co-manager James Bullock reminded investors of the need to take a long-term view of the fund. “Quarter to quarter or even year to year, performance is governed by random factors that we consider wildly unpredictable and could easily swing one way or the other,” he said.
“Over the long run however, we expect continued, compounding ownership of better than average companies to likewise produce better than average results. If we didn’t, we wouldn’t be doing it.”
Source: FE Analytics
As noted, FE Alpha Manager Terry Smith’s £17.7bn Fundsmith Equity fund has an average decile ranking of 2 but just slipped into second place by a matter of basis points in five-year returns.
This is another fund that has a long-term approach, based on the search for global companies where growth is driven from reinvestment of cashflows. Top holdings of the concentrated portfolio include Microsoft, Facebook, Philip Morris, Novo Nordisk and Paypal.
The FE Invest team, which has the fund on its Approved List, said: “Smith tends to take large sector bets with a high allocation to technology, consumer staples and healthcare, specifically medical equipment. The fund should therefore perform well if these industries do.
“On the other hand if the market was led by industries more cyclical in nature – industrials, cars and so on – the fund could lag the wider market. This positioning is unlikely to change as the team is loyal to its investment philosophy and the low turnover is evidence of this. The fund should continue to perform well in the current low interest rate environment with slowly rising rates.”
It should be noted that Lindsell Train Global Equity has a similar focus on certain sectors and has a quality-growth bias, which means its performance could start to lag if the market leadership shifted to more cyclical areas.
Rounding out the top three in this research is Seilern Stryx World Growth, with an average decile ranking of 2.2 and a five-year total return of 98.11 per cent.
Like Lindsell Train and Fundsmith, the £645.3m fund also has a quality-growth approach; this style has enjoyed a strong run for much of the post-crisis bull market and has outperformed value by a significant margin.
It’s important to point out that Seilern Stryx World Growth was managed Raphaël Pitoun for the vast majority of the period covered by this this research, but he left Seilern in 2018. Corentin Massin and Michael Faherty took over the portfolio in May last year.
Source: FE Analytics
At look at the bottom of the table shows that IA Global funds with a focus on energy has been in the sector’s lower deciles across the 10 metrics over the past five years.
Guinness Alternative Energy has the highest average decile ranking at 9.8 and a five-year loss of 11 per cent but four other energy funds can be found among the bottom-10 members and some have lost much more. Schroder ISF Global Energy, for example, is down 49.8 per cent.